IBD’s 20 Rules for Success

IBD, otherwise know as Investor’s Business Daily, has compiled a basic set of rules for success. They claim that your investment results should improve materially if you carefully follow these 20 rules (rules in bold lettering).

I have added my “two cents” after each rule based on my experiences as a trader. I can tell you that these rules helped establish my foundation towards successful investing.

New readers can try the paper for free for two or four weeks depending on a print or electronic version: Free Trial

I now use the eIBD electronic version so I can save them but I started with the print version (both are great for their own reasons).

1. Consider buying stocks with each of the last three years’ earnings up 25%+, return on equity of 17%+ and recent earnings and sales accelerating.
CP: This is an excellent rule to follow as it will filter most of the poorer performing stocks from your initial screens. Many of my fundamental screens contain these parameters although I do eliminate or loosen the ROE parameters at times.

2. Recent quarterly earnings and sales should be up 25% or more.
CP: Love this rule as earnings results do have a direct relationship to share price

3. Avoid cheap stocks. Buy higher quality stocks selling $15 a share and higher.
CP: I follow this rule about 95% of the time. It’s a must for novice investors as much of the market’s garbage is priced below $15 per share. However, I will occasionally trade a stock below $15 per share if the risk-to-reward ratio warrants the position.

4. Learn how to use charts to see sound bases and exact buy points.
CP: Learning technical analysis is a must to become a successful trader. Thousands of methods exist so discover the few that fit your trading style. Read through this blog to become familiar with my technical methods.

5. Cut every loss when it’s 8% below your cost. Make no exceptions so you can always avoid huge, damaging losses. Never average down in price.
CP: First – NEVER average down in price, NEVER! Second, always cut your losers based on your position sizing calculation which should have a direct relationship to your risk-to-reward setup. Don’t allow losses to grow larger than 8-10%.

6. Follow selling rules on when to sell and take profit on the way up.
CP: Always sell when a rule is violated. Examples could be a price falling back below a specific moving average, a specific retracement from new highs or a trailing stop.

7. Buy when market indexes are in an uptrend. Reduce investments and raise cash when general market indexes show five or more days of volume distribution.
CP: Follow the trend! Whether it is up or down, trade accordingly!

8. Read IBD’s Investor’s Corner and Big Picture columns to learn how to recognize important tops and bottoms in market indexes.
CP: I do recommend these sections of the newspaper but you can also formulate your own methods for signaling market tops and bottoms (I like to monitor the NH-NL ratio and my own index of 20-30 of the market’s leading stocks).

9. Buy stocks with a Composite Rating of 90 or more and a Relative Price Strength Rating of 85 or higher in the IBD SmartSelect® Corporate Ratings.
CP: This is a great rule for strong bull markets but the parameters must be loosened in flat or weak markets. I set my fundamental screeners to a minimum rating of 70 for both EPS and RS. I rarely use the smart select ratings from IBD.

10. Pick companies with management ownership of stock.
CP: I don’t care about this rule and don’t follow it in my research. It can help but I have never based a trading decision off of this rule.

11. Buy mostly in the top six broad industry sectors in IBD’s New High List.
CP: A solid rule for novice investors but this rule will limit opportunities for more experienced investors. Buy stocks in groups trending higher or groups starting to make a move. They don’t have to be in the top six as most will be lower when they start their initial move.

12. Select stocks with increasing institutional sponsorship in recent quarters.
CP: This is a great rule and I always check the institutional sponsorship of every stock I trade. Sponsorship, along with earnings, are my two most important fundamental checkmarks.

13. Current quarterly after-tax profit margins should be improving, near their peak and among the best in the stock’s industry.
CP: An important statistic to check but it doesn’t weight as heavily as earnings and institutional sponsorship in my research.

14. Don’t buy because of dividends or P-E ratios.
CP: I agree 110%! Growth stocks will always be trading at higher P/E multiples (history will prove this statement). Great products (stocks) usually cost more!

15. Pick companies with a new product or service.
CP: New products and services will drive earnings growth which should drive the stock price so pay attention to these news stories.

16. Invest mainly in entrepreneurial companies. Pay close attention to those that went public in the past eight years.
I love to focus on IPO’s from the past few years as they should be hitting their stride and growing faster than their peers with a minor track history on Wall Street. Bread and butter growth stocks are found in this category.

17. Check into companies buying back 5% to 10% of their stock and those with new management.
Another rule that sounds good but I don’t pay too much attention to for my own research. I don’t ignore when companies buy back stock but I rarely ever trade based on this type of news.

18. Don’t try to bottom guess or buy on the way down. Never argue with the market. Forget your pride and ego.
CP: Again, I agree 110%. Do not average down or try to guess the bottom! It’s a losers game.

19. Find out if the market currently favors big-cap or small-cap stocks.
CP: This is a secondary indictor of lesser importance that I follow but does come in handy from time to time.

20. Do a post-analysis of all your buys and sells. Post on charts where you bought and sold each stock. Evaluate and develop rules to correct your major past mistakes.
CP: All traders must keep journals to learn what went right and what went wrong. Keeping a journal can make you a better trader if you study and learn how to correct past mistake and replicate past successes. Understand why you did what you did as this will allow you to make more intelligent decisions in the future. With experience, the subconscious will take over and you should become more profitable and consistent with your trades. Studying past trades teaches your subconscious what to look for in future trades. Call me crazy but I believe this to be true.

FYI: I don’t have any arrangements and will not make any gains for promoting IBD (unless you buy a book through one of my Amazon links). I am a satisfied subscriber to their newspaper and their customs screen wizard provided from Daily Graphs (a subscriber to the paper for almost 7 years).

Comments

I think that growth stocks will implode far more in a market correction than dividend stocks, which is something to really consider when there is so much speculation about the market being due for a correction.

James,
Leaders are stocks that pass my screens, a system I developed over the years; I explain how I find these stocks in detail throughout the blog if you search the archives (search feature helps as well). The stocks I perform case studies for are potential leaders.

Archives

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Trend Trading

I am a trend trader looking for gains of 25% or more and losses no larger than 10% (preferably smaller when I am smart enough to cut the immediate loss) on trades that will last anywhere from a few weeks to several months or longer. I aim to be prepared to trade in situations when the odds are in my favor by properly employing risk management strategies such as position sizing and expectancy.